Belarus's gradual transition has been characterised by limited structural reforms and a modest expansion of the private sector. Economic growth has been accompanied by a substantial decrease in the number of households below the poverty line and an increase in household income among the bottom 40%. However, factors that enabled Belarus’s past achievements are no longer in play. The capacity of capital accumulation to drive economic growth is exhausted, energy subsidies stemming from bilateral agreements with Russia are smaller, and public debt ratios to GDP are rising. A sustainable improvement in living standards will, therefore, require economic, social, and institutional transformation, with an enhanced role for private enterprise, among others.

Being a founding member of the Eurasian Economic Union (EAEU), Belarus serves not only as a gateway to other signatories, namely Russia, Kazakhstan, Armenia and Kyrgyzstan, but also to the whole regional market. Every year more than 100 million tonnes of European cargo cross Belarus, of which 90% is bound for either Russia or the EU.

Under Belarus’s membership of the EAEU or EEU, products made in Belarus can be treated, subject to the country of origin rules, as Belarusian-made and exportable to the other EAEU markets of Russia, Kazakhstan, Armenia and Kyrgyzstan, free of tariffs. This, coupled with the country’s geographical proximity to most of the markets in Europe, as well as well-connected road and rail transportation networks, help to make Belarus an attractive destination for foreign manufacturing companies.

Belarus, as the EAEU member, has been fulfilling all the WTO obligations since 2012, since these obligations, as well as the Russian Federation obligations in the WTO, are the basis of the EAEU legislation.

In 2016, a new composition of the Interministerial Commission on Belarus’s accession to the WTO was set up. It is headed by the First Deputy Prime-Minister of the Republic of Belarus. Apart from the Government authorities, the composition of the Commission includes representatives of business associations and non-governmental organisations.

Ambassador-at-Large of the Ministry of Foreign Affairs was appointed as a Chief Negotiator on Belarus’s accession to the WTO. “As of 2017, there have been clear signals that Belarus sees WTO accession as one of the priorities for the Government. This renewed high-level political engagement from Minsk has injected new impetus in the process and is very much supported by the WTO members,” said Ambassador Kemal Madenoğlu (Turkey), Chairperson of the Working Party.

With few mineral resources of its own, Belarus is striving to stimulate foreign investment to promote privatisation, economic restructuring and innovative development. Priority areas include pharmaceuticals, food, transport and logistics, chemistry and petro-chemistry, mechanical engineering, renewable energy and IT.

Source: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

The impending dairy exports ban between Belarus and Russia in March 2018 highlights the pitfalls of the Eurasian Economic Union. It also underpins Moscow’s assertiveness when it comes to keeping Minsk within its sphere of influence and preventing its neighbour from drifting towards the EU. According to official data, in 2016 Belarus exported over US$4 billion of food and agricultural products in total, making it the third-largest export industry in Belarus behind refined oil products. On top of this, Russia is Belarus's largest export market, with the Russian market representing around 70% of food exports.

Given the more hard line stance than expected, which has come under President Trump's administration towards Russia (which saw him signing into law in August 2017 a bill imposing tougher sanctions on Russia over its interference in the 2016 US presidential election), has also meant that the US sanctions against Belarus were extended for another year in June 2017. Nevertheless, some relief to these sanctions were first granted by the former President Obama to Belarus in 2015 in an effort to better engage with the country. This relief saw waivers to US economic sanctions granted for nine major Belarus companies (such as Belneftekhim and Belshina). These waivers for sanctions were extended by President Trump in April 2017 until October 2017.

6.2 Multinational Trade Agreements

Active

EAEU - The EAEU allows for the free movement of goods, services, capital and labour, pursues coordinated, harmonised and single policy in the sectors determined by the treaty and international agreements within the union. The member states of the EAEU are Armenia, Belarus, Kazakhstan, the Kyrgyzstan and the Russian Federation. The launch of EAEU in January 2015 marked a step forward in the formation of a common market based on the norms and principles of WTO. Firms benefit from a large population and high industrial, scientific and technological potential. Firms within member states already trade extensively with each other and this will boost mutual growth in the medium term. However, they remain removed from the EU and other major trade blocs.

Treaty on a Free Trade Area between members of the Commonwealth of Independent States (CIS): The FTA is in force between Russia, Ukraine, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan and Kazakhstan. The free trade zone area was designed to reduce all trade fees on a number of goods between participating countries. Overall, the move will induce investments into Belarus's economy, ease trade, and stimulate employment. In 2014, the turnover with the CIS countries (excluding Russia) made up US$8.2 billion. Ukraine, Kazakhstan, Azerbaijan, Turkmenistan and Moldova are the country's major trade partners accounting for more than 95% of Belarusian export to CIS region (excluding Russia). Member states have an outlook for more intense scientific and technical cooperation and further development in the fields of agriculture, transport, science, culture, education, sport and tourism. In 2014, trade turnover with Ukraine amounted to US$5.8 billion, export exceeded US$4 billion.

The Agreement on the Establishment of the Union State of Belarus and Russia - The strategic partnership with Russia is to be attributed to geographical proximity, close historic and cultural links, economic ties and cooperation between Belarusian and Russian businesses. The Agreement (signed in 1999) sets up a legal basis for integration between the two countries. Russia is both a key trade partner and a major export market for Belarusian manufacturers. In 2016, the mutual trade amounted to US$25.9 billion, with exports to Russia reaching US$10.9 billion and imports from Russia reaching US$15.0 billion. Russia accounts for 50.3% of the Belarusian foreign trade. In 2017, Belarus was Russia's fourth major trading partner, behind China, the Netherlands and Germany. Belarus and Russia cooperate in the area of energy and energy resources. By fulfilling its obligations in terms of the transit of the Russian energy recourses to European countries, Belarus contributes significantly to the regional energy security. Along with cooperation in the framework of the Union State, the two countries support strengthening of multilateral cooperation and participate actively in other integration projects in the post-Soviet area. Businesses in Belarus benefit from subsidised raw materials from Russia, and economic integration with a considerably larger nation provides some financial support on times of crises.

EAEU-Vietnam - On May 29, 2015, after three years of negotiations, a Free Trade Agreement and Economic Integration Agreement between the EAEU and its member states, on the one part, and Vietnam, on the other part, was signed. The agreement provides for significant reduction for Vietnam (potash fertilisers, meat and dairy products, tractors, combines, trucks, refrigerators, medicines and food products). At the same time the agreement provides for efficient level of market protection for Belarusian producers. This agreement came into effect from October 2016.

Under Negotiation

The Association of Southeast Asian Nations (ASEAN) and the EAEU are negotiating strengthening trade ties. As the ASEAN Economic Community (AEC) moves closer to completion, it is likely that the EAEU's efforts to liberalise trade with ASEAN will only intensify. Firms in the EAEU can take advantage of the opportunities that this presents with many more advanced economies in ASEAN set to boost trade. Companies have the opportunity to expand into these markets and service a large consumer base. Asian fuel demand remains high and this will be of great benefit to Belarus.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Source: UNCTADDate last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

In policy, the Belarusian government maintains that it is highly welcoming of FDI. Other incentives include the country's favourable geographical location, qualified workforce and various infrastructural endowments. To date, FDI has predominantly focused on the transportation, construction and industrial sectors, as well as the banking sector, mobile communications, commercial real estate development, food and beverage and retail.

The Investment Code of Belarus provides for general rights and obligations for investors, though it has been described as fairly ineffective. There is also a special regulation for activities within Free Economic Zones, the High-Tech Park, small towns and rural areas.

Each special economic zone (SEZ) has its own administrative officers to help members. Joining an SEZ confers a 40% reduction in the tax burden compared to non-membership. So far almost 270 foreign businesses have taken advantage of the opportunity. The first SEZ was set up in 1996 in Brest, in the south west of Belarus, near the Polish border, and now six zones are strategically located around the country - in Minsk, Gomel, Vitebsk, Grodno, Brest and Mogilev. These zones were set up to create strong private sector enterprise and investment in Belarus and offer a wide array of incentives to both foreign and domestic investors. Registered businesses wanting to register within an SEZ must make a minimum investment of BYR1 million, but receive the tax incentives and streamlined bureaucratic procedures.

- A FEZ resident is exempt from profits tax for five years beginning on the date on which profits are declared for the first time. After the end of the five-year period, the FEZ resident pays corporate profits tax at 50% of the standard rate, but the tax rate may not exceed 12%.- FEZ residents may apply a reduced value-added tax (VAT) rate of 10% with respect to: Profits received from goods (works and services) manufactured by an FEZ resident and sold to other FEZ residents, foreign legal entities or foreign individuals. Profits from goods manufactured by a resident of an FEZ and realized in Belarus if the goods are defined as substitutes for imported goods on the list specified by the government and approved by the President of Belarus.- 50% discount on VAT on import substitution goods manufactured within a FEZ.- No taxes on real estate owned or leased in the area.- Exempt from payments to National Agriculture Support Fund.- No tax on purchasing vehicles.- No customs duty on raw materials and equipment imported from outside Belarus.- A guarantee that legislation governing firms will not change for seven years.- Each FEZ has its own administrative officers to help members and joining an FEZ confers a 40% reduction in the tax burden compared non-membership. Firms enjoy streamlined bureaucratic procedures.

Source: Fitch Solutions

8. Taxation – 2018

Value added tax: 20%

Corporate income tax: 18%

Source: PwC Tax Summaries 2018

8.1 Important Updates to Taxation Information

A number of preferential regimes has been put in place to facilitate investment, including special incentives for business within six free economic areas (0% profit tax for five years; 10% VAT), the High-Tech Park (0% profit tax for 15 years; 0% VAT), and the Belarusian-Chinese Industrial Park (0% profit tax for 10 years). More information on the investment environment and the relevant regulations can be found at the National Agency of Investment and Privatization.

If an employer wants to employ ten foreign workers or more (excluding, for example, the CEO of a foreign company or highly skilled workers), they must apply for a special time of work permit to the Belarusian Ministry of Labour.

However, the Belarusian government does not apply any strict caps on the amount of foreign workers which can be hired, and does not impose any strict hiring quotas which must be met in terms of employing Belarusian citizens.

9.2 Obtaining Foreign Worker Permits for Skilled Workers

Only EAEU citizens and citizens of certain CIS member states may work in Belarus without having to obtain a work permit. Citizens of all other states require an offer of employment beforehand, and there are various processes which must be completed before the work permit can be granted and which can be time consuming.

The employer must first apply for a permit to be able to engage in hiring foreign manpower, from the Belarusian Ministry of Labour. Once this is obtained, various documents must be submitted to the Ministry of Labour for approval for the work permit to be granted.

9.3 Visa/Travel Restrictions

As of February 2017, the Belarusian government has introduced visa-free travel to Belarus for citizens of over 80 countries for stays of a period of 5 days.

Key markets include all EU-member states, Australia, Brazil, Indonesia, the USA, and Japan. As an important step in accommodating greater synergies between Hong Kong and Belarus, HKSAR passport holders have been allowed to visit Belarus visa-free for 14 days from February 13, 2018, following the entry into force of the Comprehensive Agreement for the Avoidance of Double Taxation (CDTA) between Hong Kong and Belarus on November 30, 2017.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings

Rating (Outlook)

Rating Date

Moody's

B3 (Stable)

16/03/2018

Standard & Poor's

B (Stable)

06/10/2017

Fitch Ratings

B (Stable)

02/07/2018

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators

World Ranking

2016

2017

2018

Ease of Doing Business Index

44/189

37/190

38/190

Ease of Paying Taxes Index

53/189

74/190

96/190

Logistics Performance Index

120/160

N/A

103/160

Corruption Perception Index

79/176

68/180

N/A

IMD World Competitiveness

N/A

N/A

N/A

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices

World ranking

2016

2017

2018

Economic Risk Index Rank

170/202

Short-Term Economic Risk Score

29.2

34.2

46.7

Long-Term Economic Risk Score

32.2

33.7

39.4

Political Risk Index Rank

133/202

Short-Term Political Risk Score

62.5

62.5

62.5

Long-Term Political Risk Score

50.3

56.2

56.2

Operational Risk Index Rank

64/201

Operational Risk Index Score

57.2

56.5

57 .1

Source: Fitch SolutionsDate last reviewed: August 24, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISKThe largest economic risk to Belarus comes from the overarching reliance on Russia for concessional loans and hydrocarbons exports. The state-dominated economy leaves Belarus at the mercy of external support in order to provide it with much-needed foreign exchange reserves. The build-up of debt at the country's state-owned enterprises (SOEs) and the continued misallocation of resources as a result of policy-driven lending practices, will ensure that growth remains weak over the coming years. The lack of meaningful structural reform, essential for long-term growth, also pose a near-term risk to economic stability.

OPERATIONAL RISKThe dominance of the Belarusian state across all sectors of the economy, and its dependence on Russia for trade and economic assistance, are major deterrents to investors. Businesses currently benefiting from inexpensive utility costs due to cheap Russian oil and gas, are at risk of experiencing a cut to supplies in the event of deterioration in relations with Moscow. Trade and economic diversification remains poor and reliant on Russia and the hydrocarbons sector, where both elements bear significant downside risks in the medium term. Companies also face high costs to trade due to a heavy bureaucratic burden along with elevated labour taxes to employ workers. These risks are partly offset by Belarus's stable security environment and highly educated labour force, which somewhat improve the country's operating environment.

As an important step in accommodating greater synergies between Hong Kong and Belarus, HKSAR passport holders have been allowed to visit Belarus visa-free for 14 days from February 13, 2018, following the entry into force of the CDTA between Hong Kong and Belarus on November 30, 2017.

Belarus has a Double Taxation Agreement with mainland China.

Belarus has Bilateral Investment Treaty with mainland China that entered into force on January 14, 1995.

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